Before class¶

Go to ledatascifi.github.io and then to chapter 1.2¶

1. Make sure you have a github account¶

2. Have git and github desktop on your computer¶

Hello everyone!¶

Today, lets

  1. Finish all of your CAPM projects for all your finance classes for the rest of your college life in 3 minutes
  2. Do an auction to learn how to save \$381m per quarter
  3. Learn how we're all connected
  4. Get our hands dirty!

Ambitious, but fun; This class in miniature!

Motivation¶

Where $V$ is the NPV of your education, $B$ is biz/econ skills, and $T$ is the technical skills covered in this class:

  1. $\delta V/\delta B > 0$ (good choice in your major!)
  2. $\delta V/\delta T > 0$, and $\delta T$ is achievable
  3. $\delta^2 V/\delta T \delta B > 0$ is important but overlooked

On #2: Who has estimated beta for a stock in FIN323, FIN328, or FIN335?

On #3: Let's play a game! (Unmute your mics now)

  • Raise your hand if you've ever bid in an auction

Terms of the auction¶

  1. I will bring a \$20 bill to class next week and give it to the winner
  2. Bids in \$1 increments
  3. The winner pays what they bid, and the 2nd place player pays what they bid

What did you learn from that auction?¶

There are only 2 ways to avoid "death spiral":

  1. The Star Trek solve: Turn win-loss into no-win: split the \$18 gain from incrementing the bid
  2. The War Games solve: "The only winning move is not to play"

The two solutions have commonalities:

  1. Plan before doing: "Measure twice, cut once"
    • Think about big pic! Especially important on coding tasks where it's easy to get lost in minutiae...
    • What's the economics of the situation?
  2. The problem dictates the tool! I'm very excited about skills you will learn in this class... but when you have a hammer everything looks like a nail!
    • Here, valuation isn't the tool you need! It's game theory.

"That's silly!" Fine.. let's look at a real auction¶

Well... thousands of them. Enter: Zillow.

  1. Zillow's plan: Predict price Zillow can sell the house for, offer to buy for less, <do stuff quickly>, sell
  2. Profit hopes: liquidity provision, price appreciation
  3. Economics:
    • Have to outbid other buyers (Winner's curse)
    • Home owner knows most about the house! (Asym. Info)

Outcome of Zillow's plan¶

Nov 2, 2021: Zillow (articles here and here)

  • Lost \$381m in 3Q alone flipping homes because algo was "unable to predict prices"
  • Cuts 25% of workers
  • Loses about \$10B market cap in the week

Good valuation wasn't a good enough tool¶

Let's define a model, and let Zillow's valuation be 2x better than homeowners:

  1. True value of a house is $v$, with $v \sim U[250,000, 2,500,000]$
  2. Owner's guess $v*(1+e_o)$, with $e_o \sim N(0,10\%)$
  3. Zillow's algo predicts $v*(1+e_z)$, with $e_z \sim N(0,5\%)$
  4. Because of winner's curse and the transaction cost owners face moving, Zillow is only able to buy houses when it offers more than 20% above what the owner thinks the house is worth. Talk about is adverse selection.
  5. If Zillow buys the house, they subsequently sells the house at the true value.

What happens in this model?¶

So, if Z looks at 100k houses with values uniformly ranging from 0.25m-2.5m, and the above steps play out...

(You can figure this out with under 30 lines of python)

It buys 6k houses and loses \$300m!¶

"But hindsight is 20/20!"¶

Except... we didn't need hindsight. An NBER working paper from 2020 discussed the issues this business model faces

  • Adv. selection is key, limits scope for profits
  • Profits plummet when liquidity is low (downturns)
  • Better valuation models don't help!
  • Winner's curse increases with competition
  • Front running: Zillow's valuations are public knowledge!

What do we learn?¶

Recall, my three initial assertions:

  1. $\delta V/\delta B > 0$ (good choice in your major!)
  2. $\delta V/\delta T > 0$, and $\delta T$ is achievable
  3. $\delta^2 V/\delta T \delta B > 0$ is important but overlooked

The Zillow case study illustrates the last one.

The Zillow team got obsessed with the technical skills and how good their pricing model could be. A little attention to the business forces could have saved them a lot of money!

The goal in this class is to both¶

  1. add some powerful skills to the bottom of your resume ($T \uparrow$)
  2. think about how business settings impact the use of those skills ($T*B \uparrow$)

So that you get the good jobs, but avoid losing \$381m!

Onboarding¶

If that sounds good (great?), let's continue:

  1. Icebreaker - chain
  2. Syllabus, norms, and expectations
  3. Getting going

About me¶

convergence.png

inevitable.jpg

About you¶

  1. Name
  2. Where you're from
  3. Year/program
  4. One thing about you

Syllabus highlights¶

  • Read it! Ledatascifi.github.io, then use right arrow to "flip" to next page
  • Course oriented towards skills in Objectives
  • Structure (read it)
    • $E(Outcomes) = f(work)$, but lots of support
    • 15 minute rule + help
    • Announcements via on GitHub classmates team only! Coursesite is only for sharing private links and office hours.
  • Grades: "Participation" is big, many ways
  • Dashboard: BOOKMARK IT!
  • I'll be in class at least 10 min before and after class - please drop in to say hi

Norms¶

  • Please interrupt when you have a question!
  • Community: Help each other! (Especially in class, but not on assignments)
  • You can chat among yourselves if you are working through a problem together (DMs to me and others ok, chats to whole class ok)
  • The website and notes are not comprehensive - you can look around the web!
  • Help, resources, and hacks pages -- read them!

Enough already! Let's get going!¶

This class depends heavily on GitHub, so let's jump in.

GitHub is good for

  • cloud storage
  • collaboration
  • version control

It's like Word's Track Changes had a baby with Dropbox, and it was marketed to and designed for software developers.

weirdbaby.png

Let's learn by doing¶

(There is background info on the website, chapters 1.3-1.4.)

  1. You need a GitHub username.
  2. You need GitHub Desktop (GH-D)
  3. Click on the gradebook and assignment links in coursesite
  4. Follow the directions here: https://github.com/LeDataSciFi/ledatascifi-2022/blob/main/handouts/GitHub%20exercises.ipynb

Before next time:

  1. Finish the GitHub exercises
  2. Finish tasks in the schedule https://ledatascifi.github.io/ledatascifi-2022/content/about/schedule.html
  3. Accept invite to the organization when you get the email.
    • Go to the classmates discussion board, and click Watch to ensure you get announcements!
    • Notice in the grade section of the website: Posts and replies to the discussion board will help your grade.
    • Tag @classmates, @donbowen, @julioveracruz, or specific classmates in issue posts to get help
    • If you don't get any email announcements by next Monday, email me - something is wrong!
    • Post 2 truths and a lie in the introductions post
    • Poll: What is my lie?
  4. Any questions you want to cover in the next class? Please let me know via the form on the dashboard page.